Deposit regulations delayed

Part of the Housing Act 2004 legislation includes a provision that will control the holding of tenants’ deposit money. There are two possible ways that it may be held in the future, but the vast majority of money will be covered by the new rules. They were due to come into force in October 2006, but as a result of some valid concerns raised in the consultation, it has now been delayed till April 2007.

When the Housing Act 2004 was first introduced to Parliament there were no provisions included about tenants’ deposits. A trial scheme was being run by the Independent Housing Ombudsman and government expressed the view that this was best dealt with by the Law Commission and their proposals for reform of tenancy law.

Following lobbying, the government changed their mind and, late in its Parliamentary progress, they added in provisions that allow the setting up and running of two types of deposit schemes.

The first type of scheme is where the landlord or agent does not actually hold the deposit, but it is lodged with a third party who is approved for holding deposits. This is called a Custodial Scheme after the fact that they actually hold the money.

At the end of the tenancy, if landlord and tenant are in agreement about the deposit refund amount (could be any division, so long as they both consent), they would both request that the deposit be released in accordance with that agreement. Schemes would have to pay money out within 10 days of getting that agreement.

This could cause problems for some groups of tenants who are dependant on receiving their deposit back on one property to be able to use it for the next one.

The other type of scheme is an insurance based scheme as in this case the landlord or agent will be allowed to continue to hold the deposit, but will have to hold insurance to cover a failure to repay it. If, for example, the tenant gets a court judgement for the refund of the deposit, the insurance provider will have to pay out the deposit and recover it from the landlord or agent who is in default.

With the insurance based scheme, if landlord and tenant agree on the refund then the landlord or agent simply pays the tenant the monies   due and the scheme is not involved.

Although possibly faster to pay back money, there will be a premium to pay for the insurance. If the deposit is in the Custodial scheme the interest earned on the money will be used to fund the scheme and they will also have to pay tenants interest at a rate prescribed by government.

The stated intention is to resolve disputes faster and with less court actions and to ensure tenants are paid the money lawfully owed to them. Both are laudable objectives although it remains to be seen if they actually will achieve those objectives.

Both types of scheme would have to offer alternative dispute resolution services to try and get parties to agree the deposit refund without a court order. Current proposals would not make alternative dispute resolution mandatory and court action would remain an option.

The main problems with the original schemes (which were introduced with little consultation) hinge on issues like what happens if the tenant disappears? You cannot, in this situation, get their agreement to release the deposit or use alternative dispute resolution, potentially leaving the landlord or agent to go to court to allow them to use the money. A similar situation arises where there are rent arrears. After all if the tenant is not going to get any money back why should they bother to try and comply and assist in the recovery of the deposit?

There are penalties for not complying with the new legislation which include having to pay the tenant a penalty of three times the value of the deposit and not being able to use a section 21 notice.

The net effect of the legislation will be that only “approved deposit holders” will be able to actually hold tenants’ deposit money. Anyone else (not part of one of the insurance schemes) will have to hand the deposit over to the government approved custodial scheme for the duration of the letting.

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